For several years, 401(k) plan providers have been offering their clients “ERISA Budget Accounts” as a means of helping these clients pay their plans' reasonable administrative expenses. (“ERISA” refers to the Employee Retirement Income Security Act of 1974, as amended, the federal pension law.) These accounts are funded through a portion of the “revenue sharing” fees that the 401(k) plan providers receive from the mutual funds offered under the plans. Although ERISA Budget Accounts can be quite useful to employers, looking “under the hood” reveals some important issues for employers to consider, both from a practical business perspective and from an ERISA fiduciary duty perspective.

How Does An ERISA Budget Account Work?

A typical ERISA Budget Account might work as follows: The 401(k) plan provider receives revenue sharing collectively equal to 35 basis points from all of the funds offered under the plan. (A “basis point” is one one-hundredth of a percent.) It actually costs the 401(k) plan provider 12 basis points to perform recordkeeping services for the plan (e.g., loans, distributions, contribution allocations, eligibility determinations and vesting calculations). The difference, 23 basis points, is pure profit for the 401(k) plan provider. Instead of retaining the entirety of this profit, the 401(k) plan provider deposits a portion of it in an ERISA Budget Account.

Deposits to the Account are made throughout the year, usually on a monthly or quarterly basis. Payments for reasonable plan expenses (e.g., producing summary plan descriptions and Internal Revenue Service (“IRS”)-required amendments, performing annual accounting audits and providing plan investment advice) are charged against these deposits. At the end of the year, any balance remaining in the Account is allocated to the accounts of plan participants.

Business and ERISA Fiduciary Issues to Consider

From an employer’s standpoint, obtaining profits from the 401(k) plan provider can provide a real economic benefit – reasonable administrative costs that otherwise would be paid from corporate assets can be paid from the ERISA Budget Account. So what’s the “down side?”

The answer, for most employers, lies in the heightened level of diligence that adequate oversight of such an account typically demands. In particular, an employer considering adding an ERISA Budget Account, or whose plan already has such an account, needs to answer at least 10 questions:

1. Which employees/officers should determine what expenses qualify as administrative expenses potentially eligible for reimbursement?
2. What kinds of records should be requested from the plan’s service providers to document administrative expenses?
3. How does an employer determine that the administrative expenses are “reasonable?” (ERISA permits plan assets to be used to pay administrative expenses but only if such expenses are “reasonable.”)
4. What is the scope of the certification that the employer is required to make to the 401(k) plan provider that the expenses are eligible for reimbursement?
5. Is the employer responsible for indemnifying the 401(k) plan provider if the expenses are later determined by a court or the United States Department of Labor (“DOL”), which enforces ERISA, to be ineligible?
6. How should the employer coordinate the use of forfeited contributions (e.g., unvested matching contributions) and ERISA Budget Account balances to pay for plan administrative expenses?
7. What happens if the 401(k) plan provider does not make sufficient revenue to make allocations to the ERISA Budget Account but the plan has eligible administrative expenses that can be reimbursed?
8. Can payment be made in advance of the services being performed?
9. How frequently should the employer review the contributions and disbursements from the account?
10. How should an employer allocate a year-end balance (if contributions exceed disbursements) in the ERISA Budget Account to participants? (Scant guidance exists, but it appears that both the DOL and the IRS frown upon the carrying over of a balance from one year to the next.)

Please contact Adam B. Cantor should you have any questions about your plan’s ERISA Budget Account or, if your plan does not have such an account, the mechanics and issues involved with creating and administering one.